TMI Blog2011 (5) TMI 322X X X X Extracts X X X X X X X X Extracts X X X X ..... wireline logging and perforation equipments are eligible for a higher depreciation @ 100% under cl. (ii) of s. 32(1) of the Act, r/w item III(3)(ix)(b) of the schedule of rates of depreciation in Appendix I to the Income Tax Rules, 1962. - ITA Nos.627/2005,194/2005, 515/2006, 501/2006 208/2002, 504/2006, 683/2005, 716/2005,1081/2005 899/2007, 668/2008, 296/2010 & 433/2009 - - - Dated:- 11-5-2011 - MR. JUSTICE A.K. SIKRI, MR. JUSTICE M.L. MEHTA, JJ. For Appellant : Ms. Prem Lata Bansal, Sr. Advocate with Mr. Deepak Anand, Advocate. For Respondent : Mr. Ajay Vohra, Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. M.L. MEHTA, J. 1. By way of this judgment, we are disposing off 13 different Income Tax Appeals, ranging from assessment year 1989-90 to assessment year 2003-2004, pertaining to the same assessee M/S HLS India Ltd. These appeals, all filed under section 260 A of the Income Tax Act, 1961(hereinafter referred to as the Act), have been clubbed together on the ground that the legal issues involved in these matters are similar, though the financial figures have been kept varying with the assessment years. 2. Before coming to these legal issues it wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... denied by the AO on the similar grounds as the assessee, as per AO s view, is not an industrial undertaking engaged in manufacturing or producing an article or a thing. Though, this claim got an affirmative approval at the level of CIT (A), but the ITAT while hearing the appeals of the revenue pertaining to assessment years 1991-92 and 1992-93, restored the matter back to the desk of AO to verify as to whether the other conditions regarding 80-IA are satisfied because it has held in its own decision pertaining to assessment year 1989-90 and 1990-91 that the assessee is an industrial undertaking engaged in manufacturing or production of an article or thing for the purpose of section 32A. Claims regarding 80-IB, as made in the assessment years 2000-01, 2001-02, 2002-03 and 2003-04, were also denied by the AO on the ground that neither the assessee is an industrial undertaking nor it fulfills the basic criteria of employing certain number of persons as required by this section. Forming a contrary opinion against that formed by its predecessors in previous assessment years, the CIT(A) this time held that the assessee is not engaged in manufacturing or production of any article or thin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent case, the assessee is entitled to a higher depreciation allowance @ 100% under Rule 5, appendix I, Part 1, III (ix) of the Income Tax Rules, 1962? 8. We can now deal with aforesaid two legal issues separately one by one. The first issue is whether the production of log by the assessee, while providing wireline logging services to its clients, amounts to manufacturing or production of an article or thing so as to place the assessee at per an industrial undertaking wherefrom it can be entitled to claim various tax incentives as available to these entities under the Act. 9. The Income-tax Act provides various incentives in different sections to the industrial under-takings. Under section 32A a new industrial undertaking can avail investment allowance provided it satisfies the conditions as laid down in sub section (2) thereof. This provision reads as under: Section 32A: Investment Allowance (1) . (2) The ship or aircraft or machinery or plant referred to in sub- section(1) shall be the following, namely: (a) a new ship or new aircraft acquired after the 31st day of March, 1976, by an assessee engaged in the business of operation of ships or aircraft; (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... types of industries by the courts. 11. In the instant case, the AO, while framing the assessment orders for the assessment years 1989-90 and 90-91, denied the claim made under section 32A as it was of the opinion that the assessee is just converting into data something which is already there i.e. geo-physical properties of the earth crust which are already there are just being logged with the help of certain sophisticated equipments. The rationale behind this opinion was that the term production‟ means that by the process something new must come into existence and to qualify the test of ‗manufacturing there must be transformation resulting in a new and different article having distinctive name, character, and use. In the view of the AO, the activities of the assessee i.e. production of data could be linked to a typewriter printing out letters on a sheet of paper or a rubber stamp giving impression on a sheet of paper. 12. On appeal, the CIT(A) vide a common order dated 25.05.1992 pertaining to both the assessment years reversed the order of the AO and held that the assessee was an industrial undertaking within the meaning of s. 2(7)(c) of Finance Act 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the first time, were denied by the AO on the similar ground that the assessee is not an industrial undertaking engaged in manufacturing of an article or a thing. On appeal, CIT(A) reversed the order of the AO.Feeling aggrieved, the revenue filed an appeal before the ITAT, which by a common order dated 23.09.99 pertaining to assessment years 1991-92 and 1992-93 held that the issue whether the assessee is an industrial undertaking engaged in manufacturing of an article or a thing is settled in the favour of the assessee in the light of ITAT s order dated 10th August 1998. However, it reverted back the matter back to the desk of AO to find out whether other conditions as required under section 80-IA are fulfilled. Since then this issue has travelled to the ITAT level in every assessment year either under section 80-IA (till AY 1999-00) or under 80-IB (from AY 2000-01 to 03-04), which in turn, every time, has followed the decision of ITAT dated 23.09.99 and reverted the matter back to the table of AO to find out as to whether other requirements are satisfied. 14. Hence comes this appeal to us on this issue. 15. Ld counsel for the respondent assessee Mr. Ajay Vohra has submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that a computer system or an electronic data processing system is physically a collection of electromechanical and electronic components and devices assembled in metal cases (modules) and cabinets. These contain switching and communication components such as transistors, diodes, capacitors, resistors and integrated circuits, all combined into various types of circuitry, together with memory systems, power supplies , delay lines and various types of magnetic media such as tapes and wires for carrying and transforming data and information, as coded, into instructions and computations. The court further observed that a data processing machine is complicated machinery which could not be easily operated by lay men and special training for a period which may exceed three months in some cases and a much longer period in others is necessary in order to equip a person with the knowledge and art of operating these machines. The installation and operation of the machines is on a scientific basis and even for the purposes of installation, certain special conditions have to be provided in the form of air-conditioning or a particular temperature. The purposes for which such machines, which ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a processing on the basis of computers. While dealing with the issue as to whether the assessee was an industrial company within the meaning of Section 2(7)(c) of the Finance Act, 1981 and entitled to investment allowance under section 32A in respect of a generator installed by it, the Calcutta High Court relied upon Datacons (P) Ltd. (Supra) and held that the assessee is an industrial company. 20. In the case of Shaw Wallace and Co. Ltd. (supra) the issue was as to whether the Computer Division of the assessee-company was an industrial undertaking for the purpose of section 32A as opposed to the AO s view that the computer are of the nature of office appliances. The Calcutta High Court dismissed the appeal preferred by the department and held as under: ―25. Investment allowance is admissible in respect of machinery or plant installed in any industrial undertaking for the purpose of business of construction, manufacture or production of any Article or thing not being an Article or thing specified in the list in the Eleventh Schedule. There is no dispute that "data-processing" or "computer" is not mentioned, in the Eleventh Schedule. If, as held by the Division Bench i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of the matter, the only question arises, therefore, is whether the assessees had begun to manufacture or produce the articles after the specified date in any backward area. It is not in dispute that the assessees have commenced their work after the specified date. In short, the limited question is whether the ship-breaking can be characterised as an activity amounting to manufacture or produce an article or articles as the case may be. Whether a particular activity is a manufacturing activity is dependent upon several factors and no straight-jacket formula or principle can be applied. The manufacture implies a change but every change is not manufacture. There must be a transformation of kind and new different item should have been emerged having different features. For manufacture there should be some alteration in the nature or character of the goods. By process of manufacture something is produced and brought into existence which is different from that, out of which it is made in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied. The material from which thing or article is produced or manufactured may necessarily lose its i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacture is appearing in the company of word production which has a wider connotation than the word manufacture, the word production or produce when used in juxtaposition with the word manufacture takes in bringing into existence new goods by a process which may or may not amount to manufacture. The associated words are indicative of the mind of legislature. Where a word is doubtful or ambiguous in nature the meaning has to be ascertained by considering the company in which it is found and the meaning of the word associated with it. The words manufacture and production have received extensive judicial attention both under the Act as well as the Central Excises Act and the various sales-tax laws. The word production has a wider connotation than the word manufacture. In order to appreciate and understand the scope and meaning of the said words, it is necessary to turn to the various judgments dealing with the said subject and law laid down by the various High Courts including this court and the views expressed by the Apex Court while dealing with such contentions. The Authorities relied upon by the parties 18. The Apex Court in CIT v. N.C. Budharaja Co. (supra) observed : "The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he issue was as to whether the Tribunal was right in allowing deduction under Section 32A in respect of computers installed in premises of assessee bank, the revenue came forward with the contention that the assessee was in banking business which was not an industrial undertaking as it was not manufacturing any article or thing. Computers are like calculating machines helping in the proper functioning of the office and, therefore, they were in the nature of office appliances and that they did not constitute plant or machinery under Section 32A(2)(b)(iii). While dismissing the appeal, the Court held as follows: "Today, we have computerised accounting in the banks. In the case of computers, which existed during the relevant assessment year and even today, the operation of the computers in principle remains the same. That, commercial data is fed into the computers as inputs as per the requirement of various customers and the data is processed to get necessary information, computation and statements as outputs. These computers cannot be compared to calculators. Today in matters of investments and security transactions, banks have a front office and back office. Today, under custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inputs which are fed into are entirely different, in a different form with different indicators. As against that, the end product, viz. balance sheets, various accounts, statements, analysis etc., which emerge by way of print outs are distinct and different from the inputs, in as much as what comes out is having different connotation and use. Thus, the activity of data processing through the use of computers is one which would amount to business of manufacture or production of articles or things and the unit which undertakes such computer services for other concerns would be an industrial undertaking. 24. This court, in the case titled M/S Metalite Industries Vs. Commissioner of Sales Tax [176 (2011) DLT 792] had an occasion to deal with the meaning to be attached to the term ‗manufacture . The relevant portion can be quoted as under: 23. In view of the law as laid down in judicial pronouncements noted above, one of the tests would be as to whether the article produced is regarded in trade, by those who deal in it as distinct in identity from the commodity involved in its manufacture. Though the said article might have undergone a degree of processing, if it retains i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd realities of the business and sometimes over-simplified tests create confusion, particularly, in modern times when technology grows each day. To say, that contents of the original and the copy are the same and, therefore, there is manufacture would not be a correct proposition. What one needs to examine in each case is the process undertaken by the assessee. Our judgment is confined strictly to the process impugned in the present case. It is for this reason that the American Courts in such cases have evolved a new test to determine as to what constitutes manufacture. They have laid down the test which states that if a process renders a commodity or article fit for use which otherwise is not fit, the operation falls within the letter and spirit of manufacture. See United States v. International Paint Co. reported in 35 C.C.P.A. 87 C.A.D. 76 26. It is clear from the aforesaid judicial authorities that in order to find out whether any particular business activity amounts to ―manufacturing‖ or ―production‖ for the purpose of various tax incentives under IT Act, each case is required to be examined in the light of facts and circumstances of that very case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amage to the formation (such as erosion) is to be expected during oil and gas production. The data collected by these tools is transmitted through an electro mechanical cable to the earth surface where it is processed by a sophisticated ―acquisition software‖ which acquires and processes the data from the logging tools. After processing the data the computer gives an output called ‗logs which are said to be valuable processed data/ evaluative information/ interpretation imprinted on special film/ papers etc. and recorded on digital tapes. 29. The learned counsel for assessee further submitted that in respect of each of its contract the assessee sets up a full-fledged base at a centralized location and mobilizes/ installs equipments and deputes personnel at each such base. Each such base under each contract is claimed as a separate industrial undertaking. The facilities provided by the assessee for each such base comprise establishment of laboratory workshop, tools calibration facilities, establishment of computer centre, accounts administration/ operation office, godown, stores, communication and transport facilities, special protective storage for radio-acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere the legal proposition that ―If an operation/ process renders a commodity or article fit for use for which it is otherwise not fit, the operation/ process falls within the meaning of the word "manufacture" applies. At this juncture, we reemphasize on the observations made by His Lordship S.H. Kapadia, J. (as His Lordship was then) in CIT Vs. Oracle Software India Ltd. (Supra) that the Department needs to take into account the ground realities of the business and sometimes over-simplified tests create confusion, particularly, in modern times when technology grows each day. 32. Even from another perspective, which forms the second limb of the assessee s argument, the case tilts in the favour of assessee.Mr. Vohra has tried to draw an analogy between the production of logs by using wireline logging equipments on the one hand and the production of X-Ray and ultrasound report sheets using X-Ray and Ultrasound machines on the other hand which have been held to be eligible for investment allowance under section 32A in various judicial pronouncements. Aforesaid second limb of the argument of Mr. Vohra is of vital importance because the AO itself, while framing the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant and machinery as available to ‗mineral oil concerns as provided under Rule 5, appendix I, Part 1, III (ix) of the Income Tax Rules, 1962. 36. In the instant case, since the assessment year 1989-90, the assessee has adopted a consistent practice of claiming 100% depreciation on the equipments used by it below the earth surface on the ground that these equipments are used below the ground as open-hole equipments in mineral oil concern and the same is covered under the aforesaid provision. This claim had been denied by the AO vide its order dated 23.11.1990 on the ground that the assessee company is not itself producing any oil nor is engaged in the activity of oil drilling. It is, at best, assisting oil companies in oil exploration work and this activity of assistance in exploration does not make the assessee a mineral oil concern. Therefore AO was categorical in its finding that 100% depreciation under aforesaid provision is available to the mineral oil concerns only, and the assessee not being a mineral oil concern, cannot be given benefit of the aforesaid statutory provision. Similar claim was made by the assessee for the assessment year 1990-91. However, this time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and tear is to the extent of 100 per cent, there is no reason for the assessee to indicate that the normal depreciation is 10 per cent as mentioned in the agreement. It is, however, not possible for us to ascertain the nature of operation and the actual use of the plants and equipments in the present case. It will, therefore, be fair and reasonable to find out these facts and determine whether these plants and equipments can be treated as in the nature of plants used in the mineral concerns. If they are of the same nature, there is no reason not to allow the depreciation as in the case of mineral concerns as the assessee is doing the same operations. If, however, the nature of the operation is basically distinguishable and the plants and equipments are used in a different manner and under different circumstances, then the normal depreciation has to be allowed. The AO is directed to re-examine this aspect and decide the claim in accordance with law, after giving full opportunity to the assessee to substantiate the claim. The order of the CIT (A) on this point is accordingly set aside.‖ 39. Thus, the ball was again in the court of AO. Meanwhile, not only the assessee but t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the opinion that the lower hole used by the assessee for the wireline logging work are mobile and capable of being shifted from one well to another. These equipments are put down the hole only temporarily for the purpose of collection of data regarding the exploration of mineral oil. In the case mineral oil concerns, the equipments plant and machinery are required to be permanently affixed down the hole for monitoring their production. However, this is not the case with the assessee company which is able to shift its tools from one site to another site as operational area of the assessee ranges from Assam to Arunachal Pradesh. Therefore the AO disallowed depreciation claim made by the assessee at 100% and consequently restricted the relief at 20%. 41. Aforesaid approach of the AO came up before the CIT(A) for consideration while the proceedings in respect of the assessee s own case for the assessment year 1997-98 were on before it. The CIT (A) vide its order dated 24.10.2000 held that the AO could not disregard the certificate as well as the written reply issued by OIL, which is the best authority on the point. Accordingly, the CIT(A) allowed the claim of depreciation at 100% u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uments could not find any support in the judicial wisdom of ITAT which turned down the abovementioned pleas in the following manner vide its order dated 10.01.2002. ―On careful consideration of the rival submissions in the light of the material on record, we are of the view that there is no infirmity in the order of the learned CIT (Appeals). There is no doubt about the fact that the assessee is engaged in carrying out full range of open-hole , logging, perforation and other well completion activities as well as formation, evaluation and data processing services etc. for M/s Oil India Ltd. and ONGC which are mineral concerns. The first issue is in regard to the status of the assessee as a leasing company which leased out high-tech plant, machinery and equipment for performing the contract work on behalf of the mineral concerns. However, this issue is no more resintegra in view of the decision of the Supreme Court in the case of CIT Vs. Shaan Finance Pvt. Ltd. 231 ITR 308 wherein it was held that leasing and finance company is entitled to investment allowance u/s 32A in respect of hiring of machinery for manufacture by third party. On the same analogy, the plant and machin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn, can it be given benefit of the aforesaid provision on the basis of nature of operation of its high-tech wireline logging perforation equipments. 44. At this point, it would be interesting to note that while the appeal against the order of the ITAT dated 10.01.2002, whereby it has upheld the action of the CIT (A) to reverse the fresh assessment order passed by the AO in pursuance of the direction of the ITAT dated 10.10.1998 to do so is filed in this court in the year 2002 [listed before us as ITA 208/2002], however, the appeal against the original order of the ITAT dated 10.10.1998 whereby it had reverted the matter back to the table of the AO was filed by the revenue in the year 2005 only [listed before us as ITA 194/2005]. It is not hard to understand that filing of the appeal, though at a delayed stage of the case, against the original order of the ITAT is an act of prudence on the part of the Department. The reason being is that had not there been this appeal against the order dated 10.10.98 as passed by the ITAT, it would have been taken by assessee as acceptance of the approach, as adopted by the ITAT, on the part of the revenue that if the public Oil giants are abl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used by it in carrying out wire-line logging operations below the ground in the oil wells of mineral oil concerns at the rate of 100 per cent of the actual cost/written down value thereof as prescribed in item III(3)(ix)(b) of the table of rates of depreciation in Appendix-I to the IT Rules, 1962. 46. After hearing learned counsels for the parties at length on this issue, we are of the opinion that the Revenue s stand on this issue lacks substance. Sec. 32(1) of the Act provides for a deduction in the computation of business income, on account of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession. This provision reads as under: Depreciation. 32. (1)[In respect of depreciation of (i) buildings, machinery , plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned , wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed ] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned with, will not be so entitled. Mentioning of the fact, in the letter of OIL dated 13 Nov 1998 that these equipments/tools are meant only for use in underground oil field operations for wireline logging perforation leaves no iota of doubt that the nature of assessees equipments and its user is similar to those equipments which are owned by the mineral oil concerns and eligible for depreciation under the aforesaid entry. The artificial distinction regarding the mobile nature of the assessee‟s equipments, which has been created and relied upon by the department, is of no use because even if such a distinction exists it would neither alter the nature of the assessee‟s equipments nor the character of its user. We, therefore, are of the considered opinion that the assessee‟s wireline logging and perforation equipments are eligible for a higher depreciation @ 100% under cl. (ii) of s. 32(1) of the Act, r/w item III(3)(ix)(b) of the schedule of rates of depreciation in Appendix I to the Income Tax Rules, 1962. 49. Having decided the issue in the aforesaid terms, we may take liberty to look into this issue from a different point of view. Depreciation allowance is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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